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Sunday, August 2

Puerto Rico default looms -- the connection to U.S. mandated minimum wage hikes

Birth of a vicious cycle: "Without the exodus .. it would have been virtually impossible to impose the US-level minimum on the island.

"By 2020 it's likely two-thirds of Puerto Ricans will be living in the U.S."

First, American lawmakers and the White House need to get it straight that Puerto Rico isn't only facing a debt crisis, an economic crisis, and a fiscal crisis. There is a full-bore humanitarian crisis on the island. Puerto Ricans are fleeing the crisis -- at the rate of 100 a day.  Three guesses where they're fleeing to.

So the White House needs to stop mouthing excuses at its pressers.

And just a little warning:  if you vultures think your vulture buddies can pull off a massive land grab in Puerto Rico without anybody noticing -- what century are you living in?    

Well does it get less productive than to tell a vulture, 'You know what your problem is, you're a vulture.' 

You know what the response would be, right?  'Oh I'm not a vulture; I only prey on the living.'

If we take estate taxes into account, that's not true.  
All right, Pundita, calm down.  But you rotten excuses for human beings had better do something by Monday afternoon. And don't say there's nothing you can do.  

Okay, now exactly how did a little bit of paradise get into such a godawful mess? 
This report filed June 29 by Alan Gomez for USA TODAY provides background on how Puerto Rico's government was able to go hog wild with borrowing:
... Municipal bonds are already exempt from state and local taxes, and Puerto Rican bonds enjoyed the added benefit of being exempt from federal taxes as well. That "triple-tax-free" status made the territory's bonds incredibly popular to investors. From 2000 to 2012, the government's public debt nearly tripled from $24 billion to $70 billion, according to the Center for a New Economy in Puerto Rico.
 That left the island's governments inundated by debt payments. Combined with thousands of Puerto Ricans leaving the island for the U.S. mainland every year and a constantly sputtering economy, credit agencies lowered Puerto Rico's bond rating to near-junk status and warned of a full fiscal collapse. ...
The borrowing spree has been going on since the 1970s, and Puerto Rico's government unlike say, Detroit, is legally barred from declaring bankrupty -- and can't hope (at least at this moment) for a bailout from Washington.

But Puerto Rico's crisis is made of several parts, and while the moral hazard element resembles Greece's, unlike Greece, Puerto Rico, a territory of the United States, has had to dance to the tune of U.S. federally mandated minimum wage laws. The consequences have been disastrous for Puerto Ricans. This has lessons for Americans pushing for large minimum wage hikes for American workers.  Before turning to that part of the story, an update on the island's debt crisis:

Puerto Rico to miss payment, default looms
By Jessica Guynn
August 1, 2015 - 1:53 p.m. EDT 
Staggered by a $72 billion debt load, Puerto Ricowas likely to miss a debt payment due Saturday, setting the stage for what could be one of the largest U.S. municipal debt restructurings.
Puerto Rico's government said Friday it would not make a $58 million bond payment due over the weekend.
"We don't have the money," the governor's chief of staff, Victor Suarez, said at a news conference on Friday. He added that the government still hopes to renegotiate its debts with creditors.
A payment due over a weekend can be made by the end of business on Monday. A missed payment would be considered a default by investors.
The bonds are issued by Puerto Rico's Public Finance Corp., which has sold $1 billion of debt.
Bloomberg reported the non-payment is Puerto Rico's "warning shot to investors that officials aren't afraid to default."
Now to an analysis by Charles Lane published July11 at the New York Post -- New York being ground zero for the Puerto Rican diaspora: How US Wage Laws Helped Sink Puerto Rico's Economy.

... Puerto Rico’s economic ruin ... is partly a story of the damage an ill-considered minimum-wage hike can do.

Prior to 1974, Congress held Puerto Rico’s minimum wage below that of the mainland, a sensible policy given the commonwealth’s lower level of economic development and labor productivity.

Then, with the best of intentions, lawmakers ordered Puerto Rico to equalize its rate with the federal figure; this was phased in by 1983, and the Puerto Rican minimum wage has moved in lock-step with the federal minimum ever since.

The results were sharply disruptive, according to a 1992 National Bureau of Economic Research analysis. They included “substantially reduced employment on the island” and mass migration of suddenly unemployable lower-skilled workers to the US mainland.

Puerto Rico did post a short-term increase in real earnings, but the causal factor was the out-migration, which shrank the labor supply. Without the exodus, the authors noted, “it would have been virtually impossible to impose the US-level minimum on the island.”

Today, a full-time job at the minimum wage of $7.25 pays 77 percent of Puerto Rico’s per capita income, compared with 28 percent in the United States.

High prices for low-skilled labor kill employers’ incentive to invest and create jobs, especially in the labor-intensive tourism sector, which faces stiff competition from the hotels and resorts of lower-wage Caribbean islands.

A 2012 World Bank study found that the minimum wage, relative to the value added per worker, is nearly twice as high in Puerto Rico as it is in the Bahamas and Jamaica.

In short, the minimum wage is a major reason for what a newly published report by two former and one current International Monetary Fund economists calls “the single most telling statistic in Puerto Rico”:

Only 40 percent of the adult population on the island is employed or looking for a job — versus a US labor force participation rate of 63 percent.

Of course, many Puerto Ricans work for less than the minimum — in the black-market economy, which is untaxed. In other words, the minimum wage also helps explain Puerto Rico’s lack of revenue with which to service its debt.

Puerto Rico’s dysfunctional labor market is not only due to the relatively high minimum wage.

Also killing the demand for, and supply of, labor are the island’s onerous overtime, paid-vacation and job-security regulations.

And even at the minimum wage, full-time work in Puerto Rico pays less than the combined package of welfare, Medicaid and food stamp benefits for which a family of three might qualify.

Taken together, these factors result in “massive underutilization of labor, foregone output and waning competitiveness,” the IMF economists’ report concludes.

If progressives have their way, however, US rules on overtime, sick leave and the rest would become more like Puerto Rico’s.

A $15 per hour minimum wage, if adopted nationwide, would mean that full-time work at the minimum wage would pay roughly 65 percent of 2014 US annual per capita income — more than double the current ratio and only 12 percentage points lower than in Puerto Rico.

The point is not that the minimum wage should be abolished or the labor market immune to incremental regulation. Indeed, the US economy is much more productive than Puerto Rico’s, so it could probably absorb modest, gradual minimum wage increases.

Still, the island’s experience with the minimum wage and other labor-market regulations is an instructive tale, the clear moral of which is to proceed with caution.


On second thought -- in for a penny, in for a pound.  As long as I'm throwing a fit, I might as well go ahead and publish the entire report I only linked to above.  
The economic exodus means two-thirds of Puerto Ricans may soon live in states
by Alan Yuhas in New York
July 2, 2015
The Guardian

The Caribbean territory, whose residents are US citizens, is groaning under $73bn debt forcing it to ration water, close schools and watch its health system collapse

Facing a crisis of monumental proportions at home, tens of thousands of people are fleeing a Caribbean island in search of a better life in the United States only to find hardship and struggle on American shores. Their stories sound like those of millions of migrants – poverty at home, where the economy lies in tatters – but they differ from millions of others: they’re already American.
Unable to pay its $73bn debt, Puerto Rico has begun closing schools and watching its healthcare system collapse and 45% of its people living in poverty. A historic drought has prompted water rationing for a utility service hampered by years of poor planning. Emigration to the mainland has accelerated in recent years, activists say, and data shows that from 2003 to 2013 there was a population swing of more than 1.5 million people.
“This new wave of immigration can be compared with the immigration in the 1930s and 40s,” said Edgardo González, coordinator of the Defenders of Puerto Rico, an activist group. The Great Depression and second world war spurred the so-called “Great Migration”, when tens of thousands of Puerto Ricans moved to New York every year for nearly two decades.
Now most Puerto Ricans are arriving in central Florida, González said, but many cannot find jobs or even housing. “Some might stay with family for a few weeks, but for those who don’t have family, people end up homeless because of the lack of services,” he said.
“People end up living in hotels, living in cars or on the street. Then you have people who are homeless with kids, who get in trouble with the law, and you have to get into it with childcare and welfare services.”
In particular, González said that professionals with higher degrees were leaving the island in search of work, draining Puerto Rico of the talent it needs to resuscitate its economy and healthcare sector.
Puerto Rico is a territory of the United States and Puerto Ricans enjoy US citizenship.
In New York, fears of the wave of immigration have seeped into the city’s sizable Puerto Rican communities. On Wednesday the Bronx borough president, Rubén Díaz Jr, warned on NPR that the surge would sap the city’s services, especially in the cash-strapped parts of his borough.
The Bronx is poorest of New York’s five boroughs, with almost 30% of its population living below the poverty line. Almost 300,000 Puerto Ricans live in Bronx County, more than any other in the country, according to 2010 data; Brooklyn’s Kings County and Orange County, Florida, follow at second and third.
“Puerto Rico continues to have people leave to the tune of 100 individuals on a daily basis,” said Díaz, who is himself of Puerto Rican descent. “We’re losing a doctor a day that is leaving the island and coming over here.
“The local governments here in the United States, we have to then absorb the added cost to our localities in order to provide services.”
Díaz said that his own family was struggling to cope: an uncle unable to receive quality healthcare, cousins who can’t find work and aunts who “haven’t seen a raise in their salary in decades”.
“This is an extremely dire situation,” he said.
He urged action by the federal government, saying Congress should give Puerto Rico the power to declare bankruptcy and restructure its debt. As a US territory, the semi-autonomous island does not have the same authorities that allow others to file for Chapter 9 bankruptcy, as Detroit did to cope with its own disastrous finances.
“We’re not asking for a bailout, we’re not asking for the federal government to give Puerto Rico a dime,” he said.
The White House spokesman, Josh Earnest, this week said that the Obama administration is not considering any form of bailout for the island.
Today, 60% of Puerto Ricans live in the States and 40% on the island according to a 2014 Pew report, with most moving to Florida. Cuny professors Edwin Meléndez and Carlos Vargas-Ramos predict that by 2020, it’s likely that two-thirds of Puerto Ricans will reside in US states.
Díaz also praised Puerto Rico’s governor, Alejandro García Padilla, for the “courageous” act of admitting this week that the island’s debts are “not payable” in their current form. 
The island’s delegate in Congress, Pedro Pierluisi, has also called for lawmakers to address the island’s political status, and introduced a bill that would grant Puerto Rico the powers to declare public enterprises bankrupt.
Pierluisi himself cannot vote in the House of Representatives.
He has also called for statehood for the territory, writing in a letter to the New York Times: “No people have ever prospered while being treated unequally, and it is not reasonable to expect Puerto Rico to be the exception to that rule.”
But the problem is probably more intractable than simply bestowing statehood or bankruptcy powers on the territory, said María Enchautegui, a senior fellow at the Urban Institute, a research thinktank.
Chapter 9 authorities “would be only for municipal debt, which is very small in the whole of Puerto Rico”, Enchautegui said. “So I don’t think that is going to solve a lot of the problem.”
Enchautegui suggested that Puerto Rico should restructure its varied debts not just to cut losses but to overhaul the government. “While we are looking at what agencies to eliminate or change, we could actually make a more efficient government,” she said. Restructuring public-private arrangements, as with electrical companies and utilities, could also bring in precious revenues, she added.
Such changes would not require Congress’s intervention, although Washington would have to get involved to bring Puerto Rico’s Medicaid and Medicare systems to the same level as the rest of the states.
Enchautegui also noted that Puerto Rico had succeeded in some ways, most notably with its accessible and good higher education. She said Puerto Rico should try to use its growing diaspora as a resource rather than lament it as a drain.
“The diaspora is now more than 5 million people, most who keep relations with Puerto Rico, have family there they go and visit,” she said. “Those could be human resources, capital and knowledge that can bring back investments, businesses, networks.
“They left the island, that’s the way they have dealt with the crisis, but they are very connected to it.”


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